Sunday, October 31, 2010

What’s wrong with Micro-finance Institutions? Practically everything as the case of SKS illustrates

What’s
wrong with Micro-finance Institutions? Practically everything as the case of
SKS illustrates

When we started out in development a couple of decades ago, we instinctively targeted to reduce the influence of moneylenders, if not eliminate them completely. Why? They were seen as the traditional oppressors and exploiters in society. Their powers often overlapped with those of their caste and traditional village leadership.

Micro-savings and revolving loans often worked very well. Self-Help Groups (SHGs) being small and homogeneous, are controlled by members where borrowers themselves play a key role in the development of SHGs. They contribute small savings, regularly attend the meetings and participate in making the rules related to loans, interest rates, repayment schedules and mechanisms. These groups are thus are more likely to be characterised by self-management and self-reliance.

This is until the much-hyped micro-finance institutions (MFIs) burst into the scene. They started easing out NGOs on the specious argument that we were not equipped with our limited capability to run micro-finance lending programmes. These MFIs operate under these two beliefs:

“Having access to expensive credit is better
than no credit” and “the
observed rate is where demand equals supply”.

These two
beliefs were ironically the very same fulcrum the traditional moneylenders
operate around.

The result is an “animal farm” situation where we are now not
able to distinguish between “pigs” and “humans” and vice versa.
In fact, moneylenders have got a makeover by re-branding themselves as MFIs. A
good example is Mohammed Yunus of Grameen Bank who comes from a traditional
money-lending caste. And of course, he got the Nobel Prize and so did Al Gore
& Pachauri. And thank God, the Nobel Committee did not confer Gandhiji the
same distinction, by clubbing him with these scamsters. In India, it
is perhaps not a coincidence that Vijay Mahajan, described as the Father of Microfinance, also comes from
a traditional money lending community.

A creature of neo-liberalism, the idea of giving small loans to poor
people became the darling of the development world, hailed as the long elusive
formula to propel even the most destitute into better lives. And boy the
neo-liberals loved it as this rhetoric strongly resonated with their love of
the non-state, self-help, fiscally-responsible and individual entrepreneurship
beliefs. MFI besides fits very well with the main tenets of neo-liberalism that
includes macroeconomic policies focused on eliminating inflation rather than
expanding job opportunities; cutting government subsidies - including credit
subsidies and opening domestic markets to imports, multinational investors and
speculative financiers. The neo-liberal environment encouraged the image of
MFIs to be spun as a golden bullet to alleviate poverty, inflating its sense of
success and underplaying their lack of holistic vision and action.

Still there were many within the NGO sector, willing to speak out. Michelle C.
Schaefer in her feminist blog highlighted the following:

“MFIs overlook several of its realities,
including the shame and fear that many poor people associate with debt (suicide
rates are high amongst those who cannot repay), illiteracy (not being able to
read contracts), the possibility that debt is the last thing poor people need,
macroeconomic emergencies and natural disasters — let alone personal illness,
deaths within families, dangerous work conditions and spouse brutality.

Micro-finance detractors also list corruption,
inflated interest rates, lack of savings services, non-transparent
transactions, not reaching the “poorest of the poor” and joint liability
amongst its many faults. One Bangladeshi man even describes Yunus as the
world’s biggest loan shark.”

In the Indian context, perhaps the best refutation of MFI as poverty
alleviation’s golden bullet comes from seasoned MFI consultant, Ramesh
Arunachalam:

”Even if you lend at 0%, returns from
agriculture would most likely be negative and micro-finance skirts agriculture
and most of India’s poor are engaged in agriculture. So, micro-finance cannot
and should not be expected to make a serious impact on poverty in India”

Prakash Bakshi, Executive Director, NABARD in an interview to the
Economic Times was even more categorical:

“In a static village
economy, there is little scope to have too many petty traders. Two-thirds of
the villagers directly live on non-cash-crop agriculture, and another 20% are
small-time artisans. The cycle of economic activities for these people range
from about six months to one year. None of them generate income to meet weekly
repayments, and none of these activities generate a rate of return to afford
interest rates of 20-40%.

And if they borrow — and many are compelled to borrow at such interest rates
because banks have failed to provide them with credit that they deserve at
affordable interest rates — they would never be able to rise from their levels
of poverty, and very often just go back a few years in their economic status.”

Findings from several studies converge that poor households do not
benefit from micro-finance; it is only non-poor borrowers who benefit. A vast
majority of those with starting incomes below the poverty line actually ended
up with less incremental income after getting micro-loans, as compared to a
control group, which did not get such loans.

The real weakness of MFI is the key assumption of the business model that
treats each and every borrower as an entrepreneur. Most poor people do not even
have the basic education or experience to understand and manage even low level
business activities. They are mostly risk-averse, often fearful of losing
whatever little they have, and are struggling to survive.

Well Oiled Racket that makes Poor, Poorer, and the promoters and
financiers Multi-Billionaire Tycoons

According to the Washington Post: "Private capital first began entering the
micro-finance arena about a decade ago, but it was not until Compartamos, a
Mexican firm that began life as a small non-descript NGO whose public stock
disinvestment generated $458 million in 2007, that investors fully recognized
the potential for a windfall.

CARE, started a micro-finance institution in
Peru in 1997. The initial investment was around $3.5 million, including
$450,000 of taxpayer money. But a year ago, Banco de Credito, one of Peru’s
largest banks, bought the business for $96 million, of which CARE pocketed $74
million."

From then on, there was no turning back. Micro-finance ended up a money
making machine for almost everyone. Mark Straub in his blog on the rise of the
MFI phenomenon in India:

“Collectively, the Indian micro-finance sector
raised over $500M in private equity last year alone. With on-paper
valuations of these companies in the hundreds of millions (dollars not
Rupees!), and in at least one case over $1 billion, sales of founders’ stock in
private secondary sales has created Hyderbadi millionaires seemingly overnight,
something unseen in India outside of BPOs, Bollywood and corrupt politicians.

The rise of micro-finance as a venture
capital-backed asset class, now poised to see multi-hundred million-dollar
initial public equity offerings in the next 12-18 months on the Indian stock
exchange. Well known giants of Indian micro-finance who serve millions of
clients – SKS, Spandana, SHARE and Bandhan – as well as upstarts Ujjivan and
Equitas, have attracted millions in risk capital from top global venture
capital firms and sovereign wealth funds, in several cases transforming
themselves from non-profit NGOs to corporations in order to raise capital and
attract top management talent.”

Ramesh Arunachalam in a perceptive analysis in Malcolm Harper’s blog,
warns against the dangers of this trend of rapid commercialization by drawing
an apt parallel with the Satyam:

“MFIs have to manage multiple stakeholders
including investors and balance their expectations well. This is also very critical
for MFIs especially because of the traditional orientation of the sector and
its predominant focus on the low-income customer segment.

The Satyam fiasco happened because the
promoter was hugely focused on investors (shareholders) and wanted to create
value and wealth for them in an aggressive manner – and he did everything
possible (legal and illegal) to bolster performance, quarter on quarter and
year on year for almost 7 years. In fact, this aggressiveness, haste and
urgency are perhaps what led Satyam to grow unnaturally and eventually fail. As
one of the employees of Satyam aptly argues, Mr Raju would always want to take
giant steps and go from 100 to 1000 rather than 200."

The IPO of SKS, one of the largest MFIs in India, saw it
over-subscribed by 15 times; their Ten-Rupee share was priced at a premium of
Rs 985 - showing how much the market had confidence on their profitability
while “banking with the poor”. With earnings per share (EPS) of Rs 32.98
as on 31 March 2010, it trades with a price-earning (P/E) ratio of over 50,
given its expanded equity.

Sucheta Dalal explained in her blog how
over-priced the SKS script was:

“At the upper price band of Rs 985, the
company is demanding a valuation of almost 50 times its FY10 earnings. For a
non-banking financial company (NBFC), which has a limited period of operational
history and no dividend record, the valuation looks very much stressed.

Although the company in its draft red herring prospectus (DRHP) claims that it
has no competitive peers, SE Investments Ltd, a micro-finance lender, is
already listed on the Bombay Stock Exchange (BSE). SE Investments' EPS stands
at Rs1.21 in the first quarter of FY10. The company posted a net profit of Rs17
crore (10 Million is a crore). Based on the EPS of the first quarter of FY10, its
P/E works out to 11 (annualized), which is lower than the PE of SKS. SKS
reported a net profit of Rs 174.8 crore on total revenues of Rs 958.9 crore and
an operating revenue of Rs 873.50 crore for the year ended 31 March 2010. It
had a negative cash flow of Rs 541.20 crore for the year ended March
2010."

SKS Share is
a Trading Bear’s Dream

The most interesting question is
whether SKS can grow 50 times its FY10 revenues during F11 season. The Economic
Times gave some vital clues to the answer:

“More than 60
employees of the embattled micro lender, SKS Micro-finance, have each made more
than Rs 1 million selling their shares after listing, making a return 29 times
their investment in three years. Employees working in various capacities -
ranging from an assistant manager to a vice-president - have sold their
holdings in at least 130 separate transactions ever since the Hyderabad-based
firm listed its shares, data show.

So far, the
employees have sold 1.96 lakh (100,000) shares, accounting for nearly a sixth
(or 16%) of what they got through an Employee Stock Purchase Scheme (ESPS) in
2007. Though a comparable macro data on share sale by staff are not available,
the number of shares sold immediately after the listing is seen as a high
number. They got the shares at an average price of Rs 38 per share and in less
than three years time; the same shares were sold at an average price in excess
of Rs 1,100 - a cool profit in excess of Rs 1,050.

SKS has
introduced a mix of employee stock options and stock purchase plans since 2007,
including one for independent directors. Eligible employees were encouraged to
buy their entitlement in the stock purchase scheme, with interest-free loans
for a certain time period.

Under the
first stock option plan, only SKS chairman Vikram Akula was allotted 9.45 lakh
shares at a price of Rs 49.77 per share in December last year. At the time of
filing the offer documents, just before the public offer, Mr Akula held option
rights for another 2.68 million shares, accounting for little over 4% of
pre-issue share capital. Earlier in February, SKS Microfinance's founder and
chairman Dr Vikram Akula sold 9.45 lakh shares at Rs 6 39 per share to Tree
Line Asia Master Fund (Singapore) Pte for $12.9 million"

All pretense of altruism was cast
aside, and the so-called poster boy of MFI demonstrated his ugly face as a
profiteer prompting Sucheta Dalal to comment:

"Another
related fact is that out of the total issue size of 1.68 crore shares, more
than half or 55.7% shares are put on sale by Sequoia Capital. According to the
DRHP, the key management of SKS Micro-finance has decided to sell their stake
in the run-up to the IPO under both stock option and stock purchase plans at a
significant premium. Collectively, the transactions would imply a sale of 1.42
million shares or 8.4% of the IPO size. Although the Reserve Bank of India
(RBI) has approved the transactions and there is nothing illegal about
en-cashing investments, this raises a larger question of commitment on the eve
of an IPO."

The selling spree is very likely an
indicator of SKS employees’ lack of trust in the company’s near term future.
SKS employees, including Vikram Akula, by booking profits, were implicitly
stating that they have no confidence that SKS can grow 50 times its FY10 earnings
to maintain its present P/E.

If you are an equity trader, this could
be interpreted as a clear signal to hammer this script down in the most
aggressive way. Particularly so as the Andhra government's clamp down should
squeeze its growth in the most profound way, given that 40% of its lending is
accounted by this state. While the High Court order put these restrictions on
hold and allowed the lenders back in the field this week, close to half of all
borrowers are continuing to avoid payments, micro lenders say. Local
politicians have joined the issue by telling their constituency not to repay
MFI loans. If this situation continues for the next few weeks, it is easy to
see it can turn into a repayment crisis that can ring the death bells for many
in the industry.

MFI: Return over Capital, Highest in any
other Sector

The moot question is when SE
Investments P/E stands at a measly 11, what justifies SKS's whooping 50? It
appears to be intricately linked to the allotment pattern. The issue consists
of a fresh issue of 74.45 lakh shares with 50.37 lakh shares reserved for
retail investors. Qualified Institutional Buyers (QIBs) were allotted one crore
(10 million) shares. The company expected to raise Rs 1,427 crore - Rs 1,654
crore through this IPO, which they over-achieved.

The key to understanding all these
numbers is the differential price for QIBs/high value investors and retail
investors. While retail investors had to shell out Rs 985 for a SKS ten-rupee
share, the latter together with SKS’s existing venture capitalists, including
some private equity funds that have stakes in these companies all paid below
the listing price and made a killing.

And just who were these QIBs and high
profile investors? Big global names like pseudo socialist and financial
racketeer, George Soros, pseudo-corporate saint, Narayanan Murthy, the founder
of India's, IT giant, Infosys and pseudo-Green Vinod Khosla of Sun
Microsystems. Their profiles are sketches below:

George Soros. In 1992, the lead
fund, Soros’s Quantum Fund became famous for “breaking” the Bank of England,
forcing it to devalue the pound. Soros had bet his entire fund in a short sale
on the ultimately fulfilled prediction that the British currency would drop in
value, a coup that netted him a profit of $1 billion. In 1997, Soros was also
blamed for forcing sharp devaluations in Southeast Asian currencies.

Corporate “saint” Narayana Murthy exhorts “We need
to promote commercialisation that can be legal done, ethically sound and
sustainably carried forward”. If you take this character seriously then
consider this. His investment in SKS quadrupled overnight on allotment of the
share!! Saint Narayanan Murthy even outdid old Soros. The shares were acquired
by Soros Quantum Fund was for a total sum of Rs 19.08 crore which translates
into a price of Rs 636 per share. Soros therefore shelled out more than double
than the “Saint” did. Narayana Murthy was also quoted by the media as saying: “A
clear conscience is the softest pillow in the world.” We now have an
idea what kind of pillow he sleeps on. That's of course, assuming he has a
conscience.

Vinod Khosla. His venture
company has called cellulosic bio-fuel his “real love” and invested in more
than a dozen bio fuel ventures. These bio fuels are one of primary factors
responsible for global food inflation and scarcity; increased starvation deaths
and nutritional deficiencies; and food riots all over the globe!

Their name association however prompted
the market to accord a higher P/E. While these promoters, venture capitalists
and QIBs laughed all the way to the bank, the retail investors as usual faces
the high risk of their investment eroding in a scam-tainted company a la Enron
or Satyam. Their worst nightmare is if the script becomes too
illiquid to trade.

The good news is that QIBs pre IPO
allotment investments are locked in and the likes of Narayanan Murthy are
trapped, at least during the next two years statutory period. Nevertheless, far
from giving price stability, there are too many floating stocks in SKS that
trading bears can target to make a killing in the market.

As for the fate of SKS hapless borrowers, they continue to live in abject
poverty. With MFIs going public, all pretense is off. Now they flaunt
their real face - more accountability to private equity investors than to the
borrowers (their touted mission) I guess this isn’t new at all as this is
borrower’s story all over the world. Patrick Bond in his blog explains
the myth of Grameen Bank and exposure of Mohammed Yunus as a fraud:

“Consider this outlandish claim, made by Yunus as he got started in the
late 1970s: ‘Poverty will be eradicated in a generation. Our children will have
to go to a ‘poverty museum’ to see what all the fuss was about.’

Grameen’s
origins are sourced to a discussion Yunus had with Sufiya Begum. Describing
Begum and the first 42 borrowers in Jobra village in Bangladesh, Yunus waxed
eloquent.

But what is
the current situation in Jobra? Says Bateman, ‘It’s still trapped in deep
poverty, and now debt. And what is the response from Grameen Bank? All research
in the village is now banned!’ As for Begum, says Bateman, ‘she actually died
in abject poverty in 1998 after all her many tiny income-generating projects
came to nothing.’

The legendary Malcolm Harper, once the
chairperson of Indian MFI - Basix, once said, "Keeping people in debt is profitable to MFI no matter the social or
economic status of customer" The case of Bangladesh with the
longest and highest outreach in the world certainly validates Harper’s
viewpoint.

Interest rates: The Poisonous Fangs of
MFIs

MFIs were touted to provide the poor
access to affordable credit, reduce poor people’s need to use moneylenders and
indebtedness. In short, provide a much kinder, cheaper alternative to the
village loan shark.

Instead, they evolved as the new class
of institutionalized loan sharks which neo-liberals gave respectability to.
MFIs did of course improve access to micro loans but failed in their touted
mission to provide affordable and gentler credit and above all, one that lifted
people from the clutches of poverty. Objects of institutional financial
sustainability exhort them to charge interest rates and fees high enough to
cover the costs of their lending and other services.

In Asia, these MFIs are estimated to
charge an annual interest rate varying between 36-70 per cent. If this is
considered predatory, then consider the plight of Latin American and African
countries where interest rates hover beyond 100%. How do MFIs actually fix
their interest rates? They claim it is based on the cost of capital (interest
on loans); administrative cost of delivery; bad loan cover, and profits. Let’s
look at each one of these:

Cost of Capital

Indian MFI’s argue that they incur an
average interest between 10-11%, equal to the interest public sector banks
charge for lending to them. There are two problems with this argument. Firstly,
this is a wrong equivalent. MFIs raise their capital from several sources,
including grants and loans at much softer rates. The cost of capital should be
the average interest as a weighted function of capital deployed for re-lending
activities.

Secondly, if we accept the argument
that all or most of the re-lending activities are sourced from public sector
banks, then they are implicitly admitting that their capital for re lending is
all accounted from taxpayer’s money. Accordingly, the Indian public and
parliament has the right to determine what rates they should be re-lend. In a
market economy, MFIs have the choice to accept these recommendations, reject
and explore alternative funding sources or shut down their businesses. Cribbing
unfortunately is not one of these choices.

BAD DEBTS

MFIs claim that they are attaining
99-100% repayment. Such a rate is an envy of any public sector or private
banks. So if we take their claims at face value, then bad debts or cost of
non-performing assets should be considered negligible.

ADMINISTRATIVE COST OF
DELIVERY

MFIs argue that the costs of reaching
the poorest, most inaccessible borrowers are high, making costs of servicing
such lending high. Moreover, transaction costs are high as it costs more to
handle 10 loans of $100 than one loan of $1,000. Fair enough. But it also means
that if we take into account their touted mission objectives of offering
affordable credit to the poor, their present business model fails to align
itself to their mission objectives. Either they should change their business
model that finds a tighter alignment with their touted mission or they should
stop expecting taxpayer’s money to increase poverty and indebtedness in this
country.

A posting in the blog Smart Investor
reveals that part of the problem of high administrative costs is traced to the
exceptionally high salaries of MFI staff:

“Gurumani was
appointed in December 2008; it was supposed to be a five-year term with effect
from April 1 last year. At a consolidated salary of Rs 1.5 crore (raised this
May to Rs 2 crore for 2010-11) and a performance bonus of Rs 15 lakh per annum,
with annual increments of up to a maximum of 100 per cent. The board had the
liberty to sanction more. Plus a one-time bonus of Rs 1 crore, paid in April
2009, with a Rs 4-crore life insurance cover.”

“In any case, we are only talking of the salary and perks of the CEO.
What about the other senior MFI functionaries? They too receive bountiful
salaries, all derived from the sweat and blood of the poor”

MFIs pretend all the time being highly
efficient. If so, they would be the only sector to be an exception.
Nevertheless, this pretense comes useful to them to pass on their
inefficiencies as high lending costs to their borrowers.

PROFIT MARGINS

MFIs argue that they need a wide spread
apart from all costs to provide for contingencies and growth. Fine but the moot
question is how much should this spread be?

MFIs further argue that economies of
scale and competition will drive interest rates down. This remains only a
theoretical argument. "Mexican
micro-finance institutions charge such high rates simply because they can get
away with it”, said Emmanuelle Javoy, the managing director of
Planet Rating, an independent Paris-based firm that evaluates micro lenders!!

If at all, the average Indian MFI
interests rates appear more benign than in Latin America or Nigeria, then it
simply because other than factors internal to the MFI industry, the sector
faces strong competition from governmental and NGO SHG micro-saving programmes
in the absence of which, these MFIs would most probably formed a cartel. Past
angry public and government reactions that resulted in a backlash against them,
which included the arrests of MFI top leaders, like Uday Kumar of Share
Microfinance Ltd as in 2007, keeping their profiteering impulses under check at
least to some extent.

Sacha Singh in an interesting blog
offering a critique of micro-finance has this to say as a summary:

“An interest charge represents money taken out of clients’ pockets, and
it is unreasonable if it not only covers the costs of lending but also deposits
“excessive” profits into the pockets of an MFI’s private owners. Even an
interest rate that only covers costs and includes no profit can still be
unreasonable if the costs are excessively high because of avoidable
inefficiencies.”

Since we are aware, just a 0.5% hike in
interest rates can crash the stock market, we know to what degree corporate
feasibility is sensitive to interest rates. Just how much subsidies did Ratan
Tata gets to produce a one-lakh car? Rahul Gandhi estimates this as Rs 66,000!.
Notwithstanding this maybe an exaggeration, the likes of Narayana Murthy that
now sit on the board of SKS should know better how much subsidies Infosys, the
IT company he founded received to make it a global success that it is today -
state governments gifting land for a song, power rebates, grants, soft loans,
investment allowance, depreciation etc. It is a perversion to think the petty
businesses of the poor are viable no matter high the interest rates.

If Blood Diamonds can
be banned, why not MFIs?

Not only excessive profits, high
salaries or process inefficiencies prompts high MFI interest rates but it also
arises from the need of self-inflicted pressures to quickly and aggressively
scale-up their lending programmes that in turn, need excessive profits to
adequately plough back into their business. While it may or may not be true
that in the long-term interests rates may fall drastically as MFIs claim, the
old adage reminds us that this means nothing as in the long-term we are all
dead.

But what we know for sure is that in the short and intermediate term, the
poor are being exploited by these MFIs, promoters and investors are being
catapulted to overnight multi-billionaires, international investors are
plundering our foreign exchange from profits made from the blood money of poor
who made poorer and more indebted. That is all that matters.

If it was only exploitation, we may be
tempted to take a more charitable view of MFI relevance in society. But combine
this with oppressive face, we are left with no option but to seek their ban. A
month ago, SKS in the state of Andhra Pradesh was accused of a series of farmer
suicides that prompted the state government to introduce new restrictions on
the micro-finance industry by seeking to cap lending rates and end coercive
means of recovery. Last week alone, Andhra Pradesh police arrested three loan
agents of SKS Micro-finance and Spandana Sphoorty Financial Ltd. after
borrowers complain that they were illegally pressured by the agents to repay
their small loans around $1,300.

It was Shantanu Dutta in his blogthat
highlighted such acts of oppression is not new:

“Many decades ago, Rabindranath Tagore
wrote a short story titled Kabuliwallah, based on the life of the Afghan money
lenders who used to do brisk business in undivided India. Largely illiterate,
through a complicated maze of signs and symbols, the moneylenders kept
meticulous track of who owed them how much, when was pay day and then were
there at the right time and place to collect their dues.

Their interest rates were of course
usurious but they provided unsecured loans which their customers not having
much collateral to give found beneficial. However defaults on payments were not
tolerated and when patience ran out, the Kabuliwallah’s justice was rough and
ready. It was during such instance that the Kabuliwallah in Tagore’s story
stabbed a client, went to prison and the beginning of the story’s climax begins
there.”

For those of us in the field, suicides
due to MFI harassment hold no surprise. But we need to question the deafening
silence. Where are the voices of the likes of Christian Aid, Oxfam, Action Aid,
World Council of Churches, CARE etc who ostensibly been pursuing the
agenda of social justice? Are their hands as bloodied as MFIs or are they too
embarrassed to take on their own kind? For that matter where are the
voices of human rights groups - the Amnesty International (now headed by our
own Salil Shetty), Human Rights Watch, Human Rights Law Network, People’s Watch
etc. In particular, where is the voice of Arundhati Roy, the one book wonder
who won the Booker Prize despite poor plot and atrocious prose who now
decided to take up causes on drop of her hat whether Narmada Dam, Naxalism and
Kashmir? Does she have an opinion on MFI suicides or doesn’t she?

Sadly, it was left to the likes of Wall
Street Journal (WSJ) to see shades of the predatory lending crisis in the
Andhra suicides:

“Unfortunately, due to the high
investor inflows and saturation of this asset class, it looks more like the
subprime industry than a financing vehicle for the underprivileged. Using targeted
marketing and promises of “easy credit” and “quick cash,” predatory lenders can
trap borrowers in a cycle of high interest payments, abusive fees and terms
that can lead to home foreclosures, and ultimately devastate borrowers’
financial futures”.

The Obama Administration clamped down
on predatory lending in citadel of capitalism - the US. While the Andhra
Pradesh deserves to be complemented in doing the same, the Central Government
is dithering, fearing the consequences will affect the image of India as an
investment destination. And why should they? If it didn’t affect the US, why
should it affect us? Moreover, this government won on the plank of the Aam
Adhmi (Common Man). If the Aam Adhmi means anything, the ruling Congress Party
at the centre needs to show more resolve by introducing stronger regulation of
MFIs, if not banning them outright.

The sooner MFIs are seen as profit
enterprises, the better. The longer they pretend they are pro-poor, the longer
they discredit the NGO sector that gave birth to a Frankenstein. By 2014, they
target to reach 110 million borrowers. Remarkably, despite two decades of
operations, if statistics are to be believed, these MFIs currently reach just
20 million people in the country, a good proportionate of them, multiple
counted. Yet, they succeed in gaining an attention, so disproportionate to this
minuscule reach. Act now to prevent them from becoming an epidemic scourge in
the country. Act now, when they are most vulnerable. And how do we know they
are vulnerable? Because Vijay Mahajan, the father of MFIs in India tells
us so:

“We are facing collapse. Unless something changes on the ground, the
industry as we know it is basically gone.”

Mahajan, we have news for you. The day
when the likes of you are gone, that will be the turning point for the fight
against poverty!

Sir you have said very well. I request you yo open an MFI and run it for year. Then I believe whatever you have written here, not only me most of them follow your model. Writing is simple sir, show them by running an MFI a year

Well written but extremely biased. The problem with this kind of analysis is, one or two bad apples are shown as examples of all the apples in the world. You have a great mind and it would be helpful to use it for constructive criticism. Any sane practitioner agrees that there are problems in microfinance and need fixes but please don't throw the baby out with bath water and leave the poor behind.

Nayan makes a good point. It is easier said than done! If you have promoted SHGs, then you must have an idea how much it costs to promote, make them strong and link them successfully to a bank that would lend them adequate credit. Where does this promotion and capacity building money come from? Would you include that in operations cost? If government is linking them to banks and offering loans at 3% rate, is that not taxpayers money? There is hell lot of corruption in govt in connection with these linkages. Are the politicians not making money at the cost of taxpayer? If MFI promoters are making millions, then our so called public officials and people representatives are sucking out billions from the system. Former is out in open because you can see the financial statements of MFIs but the latter is not although it is an open secret.

So let us not pass judgments without offering viable alternatives. At the end of the day our age-old loan sharks will benefit and poor will become even more poorer. I think there is nothing wrong with microfinance per se but there is certainly something wrong with some of the ways it is conducted as Malcolm Harper puts it nicely in his book. We need to fix it and not kill it my friend.

1. Yes there are costs in building up SHGs. But the costs related to savings and revolving loans need to be apportioned.Why? This is because the latter is only one of the elements of our intervention in contrast to MFIs where it is a stand-alone one. Savings and revolving loans are looked by us as only a means to an end unlike MFIs who treat it as an end by itself.

2. You point out "Where does this promotion and capacity building money come from? Would you include that in operations cost?"

Of course they are grants. In contrast to MFIs who adopt full cost+ pricing policies, we believe that the objectives of social lending need to be realized, then some sort of subsidy is required to achieve them. Our focus is attempt to improve the sustainability of livelihoods of people instead of those of the institution that delivers credit as in the case of MFIs. If the SHGs are strong enough, we can walk away and they would still function in contrast to MFIs where their entire operation crumbles.

Now grants and subsidies are not unique to NGOs. MFIs get them too - usually the MFI is one a member of network of organizations that the same promoter maintains cross-holding and control.

2. "If government is linking them to banks and offering loans at 3% rate, is that not taxpayers money?" Of course it is taxpayer's money. But we use it to reduce poverty rather increase it as MFIs do.

3. "There is hell lot of corruption in govt in connection with these linkages" What makes you think there is no corruption in MFIs? Maybe the media will expose them in the weeks and months ago. If the NGO is corrupt that there would scope for corruption. But the reach of NGOs are limited while MFIs are more broad. So corruption in MFIs are more significant in case of bad apples as you term it.

Besides, usually NGOs are great social networkers and usually well connected with bureaucracy and politicians. Then they have accounts & deposits with banks. The banks have quotas for SHG lending too. These are the realities NGOs use to their advantage to facilitate bank lending to SHGs.

3. "If MFI promoters are making millions, then our so called public officials and people representatives are sucking out billions from the system." This is quite irrelevant to this debate. One wrong doesn't justify another. Just as media and civil society exposes politician corruption, we need to expose corruption wherever it takes place.

4. "So let us not pass judgments without offering viable alternatives. At the end of the day our age-old loan sharks will benefit and poor will become even more poorer."

Is a program that makes people poorer than they were at the start even alternative? The whole point of my posting is build the case that we are better than having such alternatives. MFIs are age old loan sharks who repackaged themselves. Today, unlike the past the vacuum is partially filled by NGO and governmental SHG programs.

5. "I think there is nothing wrong with microfinance per se but there is certainly something wrong with some of the ways it is conducted as Malcolm Harper puts it nicely in his book."

I am not surprised at Malcolm Harper's take. After all he had been the chairperson of Basix - the MFI of Vijay Mahajan touted as the father of Indian MFI for a number of years. After enjoying the benefits of this position for years, what else can he say?

I can understand your anguish and my response no way wants to absolve the MFI's of their excesses.

However, i want to point out to the fact that SHG based institutions survived/ are surviving on grants, subsidies and donations both from GOVT and other donars.

If we add all these expenses and ask the borrower to pay for these costs then the interest costs etc will be not very different charged by MFI's.

In SHG's tax payers/ donars are bearing the cost.

Why in AP SHG get debt at 3% pa ( Interest subsidy provision of Rs 200 Cr in budget) from Banks and MFI get debt at 13%? To get debt MFI has to show its well capitalised and for that the promoter has to look for equity investor.

So they are no way better better in terms of costs the only difference is some one else bearing those costs.

My question is when Infosys can get land either free or a fraction of market value, power rebate, export subsidy, grants, soft loans etc. is this justified. To produce a Rs 100,000 car, each car is subsides by Rs 66,000.

Why is it that there is no problem of subsidies with corporates and there is a problem only when it is targeted to the poor?

Basically, MFIs are taking depositors' money from Commercial Banks(Public and Private) for their onlending. What is so great in it? Where is the entrepreneurship in it? It is nothing but playing a role of a "broker" in the transactin and masqurading as a social entrepreneur. MFI saga is a big scam where public money is diverted for private gain. This should be banned and banks should not lend to MFIs. Why can't banks use their own branch network for providing credit to these poor women? Why do they need intermediaries? I hope wisdom dawns upon our policy makers to curtail these MFIs and stop the flow of public money to these profiteering MFIs.

1.Killing MFIs is good for money lenders. In fact, one of the earlier attacks on the MFIs in AP was led by a prominent AP based chit fund and the newspaper owned by it. 2.It also is good for those NGOs which used to control SHGs and exploit them to raise funds. With entry of MFIs, these NGOs face extinction. Governance is worse in these unregulated NGOs and their leaders are used to leading lifestyles which will match any mainstream company CEOs. Source- grants raised showcasing SHGs and of course tax free. 3.The much touted SHG movement is worse than its MFI sibling. Many SHGs hardly get any bank loans even after waiting for years. When the get it, it is often smaller than their savings accumulation with the bank. On the other hand, there are SHGs in south India which got huge loans but clue less of how to utilize. Network of NGOs and agents have sprang up who will create bogus proposals, obtain bank loans in the name of SHGs and take their cut. The project cannot be implemented as the SHG is not capable. The SHG members struggle to repay the loan and finally defaults. The level of corruption where co-operative banks are involved is very high. If MFI is bad SHG movement is worse ! Is banning SHG movement the way out ? There are studies by Microsave on SHGs which is very enlightening!4.Some of the suicides have SHG linkages as well, which is not free from the over-indebtedness issue5.MFIs do not lend their own money. They get funds from banks which lent unscrupulously to achieve PSL targets. 6.The way out is not to kill MFIs or SHG movement or the banks. The way-out is to govern the sector. But for this the underlying motivations of the stakeholders in taking extreme views should be recognised and revealed. Who are the people behind all these and who are talking ? Responsible lending by banks, expanding choices of poor and enabling them to choose wisely should be the solution and not reducing the choices

Are you the same Rajan based in Bangalore and conducted an evalution for BfW with Mr.KS Gopal wat back in 1991 in Rangareddy Dist.If you areso pl let me know.

I do not want to coomment on all these characters you have mentioned in your blog. But certailnly Vijay Mahajan's contributions to livelihoods and Institution development is highly appreciable and unchallnged.

My own vision for Microfinance is based on an integration of micro-credit targeted at very poor women with traditional wife-beating activities which should be properly monetized and brought into the market (Coase's theorem) under the rubric of loan uptake and recovery costs, thus enabling domestic violence to count towards the G.N.P. This can not only rapidly lift poor countries out of poverty, but the securitized globally traded assets thus created could be used to fund the bail-out. Vikram Akula's ex-wife already has her own Domestic Violence N.G.O. It should merge with her former husband's operation so as to blaze a trail not just for Third World Countries but also the brave new Post-Obama U.S.A.ruled by Momma Grizzlies escaping the effects of Global Warming on Alaska.

Hello Mr. Rajan: Thank you for a detailed analysis and i agree with you. You mention that "At the moment we are focusing our campaign on the top 10 MFIs who control 75% of the micro-lending market. According to Paretto's Law - if we control this segment, we get maximum impact"

The campaign? Not an organized or coordinated one.Its mission is to help MF regain its soul. If it can't, we destroy to build again.

Here's an opportunity for all those who have the poor in heart and want to see MFs rein in or change, to contribute in their own way, time and specialty. We know the MF lobby in the country are organized, well funded and influential. It's a David vs Goliath battle.

In your conclusion the first time we visited, you suggested that MFIs’ in India be scraped. We felt this is throwing away the baby with the birth water. During our visit today, we discovered you have slightly amended your position, calling for MFI Regulation if outright ban is not possible. We have also noted the spirited defense of your views and spirited defense of divergent views expressed by Participants in your MFI Dialogue.

Our study finding is that in tackling Poverty in India or any other country, Finance is a Basic Infrastructure and a Basic Right. Therefore our suggested way forward, is to overhaul MFIs’ in ways that effectively address all identified flaws – focusing on solutions and opportunities rather than focusing on problems and passing blame. This alternative would achieve sustainable results in delivery of Finance as Basic Infrastructure and Basic Right to the Poor in India, other Developing Countries, UK, US and other Developed Countries, that is Poor in all Countries Worldwide.

Can you and Participants in this Interesting Dialogue, especially those from Powerful Financial Institutions, Powerful Governments and Powerful NGOs' across the World take this discussions to this next level?

Good to hear an African view. Some of the worst excesses of MFIs are in Nigeria where you belong. Interest rates are double those prevailing in India and some enforce compulsory deposits of 25% of loan amounts, while charging interests for the latter a lot.

Don't get be wrong. I like MFIs banished from the face of this earth. Getting them heavily regulated is Option B!

We don't want to go to the next level yet. We will do so when the government brings out the MFI bill in a few months from now. Too long these MFIs have masqueraded as "Mother Theresa" or Saviors of the Poor, under whose cover they exploited and oppressed the poor. We like to totally expose their dark underbelly, by stripping off their masks.

Basically, We always measure with the money he has made......If we shift our focus on what good things he has done ....

I request writer to basically understand what efforts it takes to build the organization and do field illustration of work that SKS has done during the period rather then what he individually (i.e. Mr Akula) have earned from it.

In Business no one is Mahatma/Saint it is the quest or quality that he has possessed to run the business

Learning and implication of microfinance is very important before such kind of post

Bubble Investment -- Can anyone recommend where I can find a US based (preferably near where I live in Chicago) Microfinance Investment Fund that has investments in a Mexican or Indian MFI that can give a market return subsidized by either donations or Government grants? My friends and I have a free weekday coming up and would like to picket outside their offices. Thanks.

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